Chapter Two - PRINCIPLES of MICROECONOMICS by N. Gregory...

PRINCIPLES of MICROECONOMICS by N. Gregory Mankiw (4 th Edition) Chapter Two Outline CHAPTER 2: THINKING LIKE AN ECONOMIST The Economist as a Scientist-Economists try to address their subject with a scientists objectivity-Essence of science = scientific method o Scientific method – the dispassionate development and testing of theories about how the world works The Scientific Method: Observation, Theory, and More Observation-Interplay between theory and observation occurs in economics-Experiments difficult in economics-Substitute for laboratory experiments = natural experiments offered by history The Role of Assumptions-Assumptions can simplify the complex world and make it easier to understand-Art in scientific thinking is deciding which assumption to make Economic Models-Models built with assumptions -Use models to learn about the world-Composed of diagrams/equations Our First Model: The Circular-Flow Diagram-Circular-Flow Diagram – A visual model of the economy that shows how dollars flow

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